Hedge Fund Return Downside deviation calc

CFA Level III
#1

Can someone please explain they get at EOC volume 5 page 128 downside deviation of 28.78 for HF? If it is in the book it can be on exam! Thanks

#2

  1. look at fine print under table where they state 5% hedge fund benchmark return per year.

  2. that translates to 0.4167% per month.

  3. deduct 0.4167 from hedge fund monthly return.

  4. square those where difference is positive

  5. take square root of (sum of squares where the difference is positive/ # of entries where the difference is positive)

#3

Thanks, I couldnt realise where they are getting that 5%…footnotes!

#4

Cpk, as this is downside deviation should’t we square and then add these where the difference is negative (returns below 0.4167)?

#5

I couldn’t replicate the actual result 86 as well but without actual calculations…for 8.6348 number…that page is quite comprehensive for HF return calc

#6

Got it. We should only square the return is below the threshold of 0.41% and ignore the rest.

#7

did you square the difference or only returns, which are below?

#8

square the difference - gives you 28.78

I made a mistake on the denominator - it should use (n-1) = 11 to get a monthly downside deviation then mutliply by sqrt(12) to annualize.

#9

You square each difference and then add all squared differences divide by n-1 and take a square root. Try EOC quite helpful or page 86.

#10

I’ve done it. Didn’t think about how they arrived with this value though. Thanks for the feedback.